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Title: Treasury Management Model with Foreign Exchange Exposure
Authors: Volosov, K
Mitra, G
Spagnolo, F
Lucas, CA
Keywords: Scenario generation
Stochastic programming
Fx currency hedging
Value at risk
Vector error correction model
Treasury management
Forward price
Spot price
Mark to market
Publication Date: 2005
Publisher: Springer
Citation: Computational Optimization and Applications, 32(1-2): 179-207(29), Oct 2005
Series/Report no.: CARISMA;CTR/28/04
Abstract: In this paper we formulate a model for foreign exchange exposure management and (international) cash management taking into consideration random fluctuations of exchange rates. A vector error correction model (VECM) is used to predict the random behaviour of the forward as well as spot rates connecting dollar and sterling. A two-stage stochastic programming (TWOSP) decision model is formulated using these random parameter values. This model computes currency hedging strategies, which provide rolling decisions of how much forward contracts should be bought and how much should be liquidated. The model decisions are investigated through ex post simulation and backtesting in which value at risk (VaR) for alternative decisions are computed. The investigation (a) shows that there is a considerable improvement to “spot only” strategy, (b) provides insight into how these decisions are made and (c) also validates the performance of this model
Appears in Collections:Mathematical Science
Dept of Mathematics Research Papers

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